As chair of the marketing department I would like to add my personal welcome to visitors of the department's website.
For decades, Kellogg has been the recognized leader in marketing. Why? Because to us, marketing is more than a function or discipline. It’s a mindset: a way of looking at the world that is customer-focused, insight-driven and ever-evolving. We apply an innovative, multi-discipline, research-based approach to developing and testing new theories and educating the next generation of leaders. The result? Our graduates lead organizations that create new markets and deliver superior customer experiences that produce sustainable growth.
On our website you will find a brief history of the department, bios of the department faculty, descriptions of courses taught in the Master of Business Administration (MBA) program, requirements for completing a major in Marketing, information concerning the Ph.D. program, and executive programs offered by the department.
Cash or credit? In the United States, it is often the small plastic card we reach for to finalize a transaction. But as many people discover the hard way, one pricy impulse buy, one late or missed payment, or one emergency swipe of the plastic can lead to an intractable mountain of interest payments. Lawmakers recently stepped in to help consumers. But new research by Neal Roese, a professor of marketing at the Kellogg School, points to evidence that those regulations are not having their intended effects. They may, in fact, be making the problem worse.
In 2009, rising personal credit card debt prompted action from Congress in the form of the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act. The CARD Act requires all credit card companies to include a minimum payment warning on customers’ credit card statements. The warning indicates how long it will take customers to pay off their debt if only the monthly minimum is paid. In addition, credit card companies must also include a second scenario—the three-year payoff plan—illustrating the monthly payment required to pay off credit card debt in three years (though only when this amount is greater than the monthly minimum payment).
The reasoning was clear: Make it easy for credit card users to make informed financial decisions by providing them a clear, concise picture of their credit debt, and they will pay off that debt much more readily. Moreover, the thinking goes, presenting credit card users with a three-year payoff plan will help them earn savings in the long run, since paying off their credit cards according to a set plan will help them avoid interest charges.
But how successful are these dual-payoff scenarios at encouraging consumers to pay down credit card debt as quickly as possible? Although the CARD Act was passed with good intentions, it turns out that seeing the three-year payoff scenarios in fact encourages people to make lower monthly payments than they otherwise would, according to Roese.
Roese’s research, conducted with UCLA professor Hal Hershfield, suggests that customers infer that the three-year payoff plan is the more appropriate path to take—even if they have the means to pay more per month and, therefore, erase their debt much faster. “People tend to flock to this three-year amount, this second scenario,” Roese says. “But what is the best thing for you? That’s not what the credit card statement is saying, but people seem to be reading that into it.” To offset this impulse, their research found, it is better to explicitly tell people they can pay up to the full amount they owe on a credit card bill or to remove completely all mentions of a second payoff scenario.
A Hefty Charge
Roese and Hershfield decided to delve into credit card statements after examining the dual-payoff scenarios presented on their own credit card statements. A recent statement one of them received showed a balance of $2,601. With a minimum monthly payment of $25, the card would be paid off in 11 years. Alternatively, the statement noted, paying $71 per month would lead to the card being paid off in three years—for a “savings” of nearly $1,200.
“We thought it was funny and amusing that this credit card statement would use the word savings,” says Roese, who observed that the savings being hawked was really just the difference in the amount of interest paid over time.
Across seven experiments, the pair investigated whether, when presented with a dual-payoff scenario, the three-year payoff plan would act as a cue for consumers to make a smaller monthly payment than they otherwise would. In one experiment, for instance, more than two hundred adults divided among three groups imagined their latest credit card bill of $1,988 had just arrived in the mail. The minimum monthly payment, they were told, was $41. Some participants were given only the balance owed and the minimum monthly payment; they chose to pay an average of $830. Other participants were also given the balance and the monthly minimum, but they were additionally informed that it would take them five years to pay off their credit card at the monthly minimum; this group chose to pay, on average, $657.
It seems counterintuitive that getting more information about the time it would take to pay off a balance would push people toward paying less. But the experiments indicated that this was nonetheless true. “It was definitely a surprise. We tested it over and over and over again to see if it was a consistent finding,” Roese says.
In the final group, participants received yet another piece of information: a three-year payoff scenario, in which monthly payments of $51 would pay off the balance plus interest owed in three years. This group chose the lowest average monthly payment of all: just $203. “That three-year scenario amount seems to be really luring people,” says Roese. “Most consumers can do math. But a lot of people are just too busy to think through [credit card bills] in logical, rational terms.”
The Plasticity of People
What might be done to encourage people to make smarter financial choices? Roese and Hershfield’s research shows that the three-year payoff cue can be effectively negated if customers are presented with a range of payments they can make, including paying off the full balance. When study participants were shown statements that reminded them “You can pay any amount between $0 and the maximum payment” in addition to providing the three-year payoff plan, more participants opted to pay the full balance compared with participants who were presented with only a three-year payoff scenario.
A reminder like this is so influential because it lets customers know that they have some freedom, says Roese, encouraging them to consider all of the possible payment scenarios. Once people realize that the monthly minimum and the three-year payoff plan are merely suggestions, they may choose to make a larger payment.
The biggest public policy implication from the research, according to Roese, is that any revision to the 2009 CARD Act should get rid of the requirement that credit card companies include a three-year payoff plan on their statements, which people tend to interpret as a default amount to pay.
“That default is something that matters,” says Roese. “What if the default were the full balance?”
Roese did not test consumers by presenting them the full balance as a default payment, but it is a “reasonable inference,” he says, to think that we have engineered bad credit behavior by introducing three-year payoff plans to people’s credit card statements.
Whatever changes policymakers enact, nearly one-third of the people Roese and Hershfield surveyed in summer 2013 said they only ever looked at their credit card statements online, a condition that sufficiently insulates them from the possible negative effects of the CARD Act, which applied solely to paper credit card statements. But among people who routinely received paper statements, those who read their credit card statements in full were less likely to make a larger payment.
Sometimes it pays to ignore the fine print.
Artwork by Yevgenia Nayberg
In Saudi retail startup aura living, Ned Smith, an associate professor of management and organizations at the Kellogg School, found a perfect case study in growth strategy implementation. Soon after aura opened its first store in Saudi Arabia in 2011, the mid-market furniture and home-accessories company had a problem on its hands: one of its early sales strategies helped turn it into a prestige media darling.
“It’s a good problem to have,” Smith says.
But it is a problem nonetheless. Though aura founder and CEO Noura Abdullah had established the company to serve as an affordable and tasteful alternative to luxury Middle Eastern brands or the Western “beige” style of furniture sold by Ikea and Pottery Barn outlets in Saudi Arabia, one early win threatened to undermine the company’s initial market strategy.
“We had business-to-business relationships with the five main wedding planners for lavish Middle Eastern weddings—these are the kinds of events with 2500–3000 guests,” Abdullah says. “Because of our success furnishing these weddings and the attractive look and feel of our products, we got coverage in a string of publications like Harper’s Bazaar and Martha Stewart Weddings.”
Establishing Brand Identity
How has that affected the company’s efforts to attract mid-market customers to its showrooms in Riyadh and Dhahran? “You can argue both ways,” Abdullah says. “You can say these publications cannibalized us reaching our target audience, making it difficult for customers to look at us as attainable. On the other hand, you can look at the publicity as supporting our brand image and giving mid-market customers an opportunity to be proud of that image.
“We did very little marketing in the beginning, primarily because it is very expensive to put ads in newspapers and magazines,” Abdullah continues. Instead, “we put time and energy, rather than money, into approaching media outlets. We also made sure our products were beautifully photographed.”
Smith sees great opportunity in aura’s initial burst of good press, identifying status and brand identity as competitive assets the company can use to its advantage. “Being affiliated with high-status others can lower your costs and increase your perceived quality,” Smith says.
But while aura’s marketing growth strategy may have allowed aura greater flexibility in establishing a brand identity, Smith thinks aura’s viral marketing campaign might have been more targeted. “aura should have spent some time understanding social-media use in their core market,” he says. “More importantly, aura should have tracked its reception in the social-media-osphere from the get-go. They may have realized sooner rather than later that their reception was clustering at an end of the market that they did not intend to target and proceeded to purposefully and strategically ‘seed’ other ‘neighborhoods’ in the social-media network.”
Increasing Mid-Market Footfall
So far, it does not appear that mid-market customers are flocking to aura.
“Rich people are walking through the door and buying, because it is fashionable and not expensive,” Smith says. “But that’s hurting aura’s growth, because they know that if they could get the right people in the door, those people would buy aura’s products. They’re just not coming through.”
As a retailer, there are three main factors that aura is tracking: footfall, or how many people walk in the door; conversion rate, or how many of those people make a purchase; and ticket price, or how much each of them spends. The company’s conversion rate is very high—especially for a furniture retailer—and its ticket price is much higher than anticipated, but its footfall is lagging behind expectations.
“What this tells you is that people are afraid to walk into the store because they feel that it’s high-end,” Abdullah says. “Once they walk in and they see our price point, they are pleasantly surprised and they almost always make a purchase.”
How has the company responded? First, aura is emphasizing pricing by introducing in-store overhead signage that fits with the brand image without cheapening it, while targeting price-conscious consumers. Second, press releases for its primary products are promoting the company’s accessible “within reach” pricing. Third, aura is paying special attention to its pricing strategy to ensure that it attracts and maintains its target audience. Because much of the Middle Eastern design and fashion conversation happens on Instagram, aura is now monitoring social media closely to keep tabs on customer reaction to its current price points.
Attracting Two Market Segments
Rather than abandon its initial target customers now that it has established itself as a status brand, aura sees a window of opportunity to broaden its customer base. “We feel we can attract both high-end and middle markets,” Abdullah says.
Smith agrees. “In theory this is great. They stumbled upon a set of consumers they had devoted little to no resources to target,” he says.
But he sees risks at play in the strategy of targeting two market segments. “One is about resources,” says Smith. “Like any diversification strategy, engaging two markets requires more resources and diffuse attention than engaging in one. This is particularly relevant for small companies, which may not have the resources necessary to pursue multiple market segments successfully.”
Abdullah is aware of that resource-intensive decision. “For the future, we need scale: to cover head office costs, to get the benefits of discounts, logistics, and supply chain,” she notes.
The company is trying to scale up without going mindlessly into new markets. Its initial plan was to open five stores in Saudi Arabia. When sales and delivery data showed that the market would be saturated at three stores, aura shifted course—putting more resources into advertising and marketing, as well as perfecting its e-commerce business—as ways to increase sales before expanding to the greater Middle East region.
“The second risk,” Smith notes, “is about identity and consumer perception. Engaging in multiple markets can create ambiguity in the minds of consumers, which can lead to devaluation.”
The company is tackling the risk of brand confusion in subtle ways. For the opening of its store in Jeddah this year, aura is maintaining their “cool factor” by sponsoring a dinner event hosted by local fashion and design bloggers. The Jeddah store is also smaller and located in a less premium area in the mall to test whether location and store design can increase footfall. The shop is simpler while still embodying the brand, and it has been designed to attract Jeddah’s traditionally more cost-conscious customers.
“We’re trying to avoid the mistakes we made in Riyadh,” Abdullah says. “We want to convey that we’re attainable.”
A marketing manager with an eye on the C-Suite might wonder how best to manage the transition and be effective with boards of directors. Through the Kellogg School’s CMO Program, top executives Homi B. Patel, Rick Lenny, Matthew Paull, and Mary Dillon offer marketing leaders advice on what they can do to foster effective team and board interactions.
Homi B. Patel: Provide the big-picture view
Homi B. Patel is retired Chairman, Chief Executive Officer, and Director of Hartmarx Corporation.
Let’s face it: as a chief marketing officer, you don’t get a lot of face time with boards, but when you do, you want to be effective. How you utilize that face time is as critical for board members as it is for you. When you get face time as a CMO, you may naturally approach that interaction from the position that you have, while the board is evaluating you from the position you could have, because the most important job of a board is succession planning at the top levels of the business.
If you aspire beyond the CMO position, what the board wants to hear is that you have a holistic picture, that you have the ability to break down silos, and that you can make marketing ubiquitous throughout the company—which means cross-functional in many ways.
When presenting to the board of directors, don’t try to cover everything. If you try to cover everything, you risk losing board members’ interest because you can go way into the weeds. Board members are not interested in the weeds because they have acquired the ability to deal with ambiguity. They meet, they go away, and three months later they come back and they capture the current picture. So it’s critical to avoid burrowing too deep into the particulars of a single topic or trying to cover everything under the sun.
Rick Lenny: Focus on the perspective of your board of directors
Rick Lenny served as CEO and Chairman of The Hershey Company. He serves on the boards of several major corporations, including McDonald’s.
When building board presentations, the biggest challenge for a CMO is to make sure to keep the board’s perspective in mind. When listening to a CMO’s presentation, I ask myself: “Does this CMO understand what drives superior marketplace and financial performance?” In my role as a board member, what I expect from CMOs is that they frame their presentations in terms of understanding the value drivers across the business. Think about it this way: the CMO is the best person to take the insights from a clinical standpoint and relate them to winning in the marketplace from market-share-growth and financial standpoints.
CMOs like to play offense—it’s what they do to build brands into the marketplace. But board members have a healthy level of skepticism about things that work versus things that don’t work. They’re thinking about the risks. They may approach the CMO with questions about competitive situations and competitive response as a way to understand the risks associated with the business. This is a great opportunity for a CMO to foster a deeper understanding of the company’s marketing concept.
Matthew Paull: Know your CFO
Matthew Paull served as Executive Vice President and CFO of McDonald’s before retiring. He has served on corporate boards including Best Buy and KapStone Paper and Packaging.
In some companies, tension might arise over how the CMO is perceived in the C-Suite, especially in the CFO’s office. That may be due to a lack of understanding by members of the C-Suite about what the CMO does or a perception that it’s very hard to measure what the CMO does. Whether this is fair or unfair, the CFO’s view may be that the CMO has the sexy job while they get the grunt work. Since the CFO in most organizations is the person who puts the metrics in place and makes sure that compensation is tied to achieving those metrics, my advice for CMOs to reduce some of that friction is first to find a metric that can be measured and then to make themselves accountable for that metric.
When preparing board presentations, there’s a decent chance that the CFO and the general counsel will sit in on the entire board meeting except the executive session. They understand the personalities, they know what makes presentations work, and they know the mood of the room before the CMO steps in there. If the CMO has a good relationship with the CFO or general counsel, the latter can offer feedback in advance of the CMO’s presentation and communicate what’s happening in the room.
Mary Dillon: Lead through cross-functional collaboration
Mary Dillon is currently CEO of Ulta Beauty.
I believe new CMOs should consistently apply a cross-functional, collaborative lens to their focus and priorities. My career began in consumer packaged goods—at Quaker and Pepsico—where I learned and began to deeply value that the best business solutions are derived from two points of view: the consumer and a cross-functional representation of the organization. CMOs should lead the way in asking the business two questions: “Whom are we trying to serve and how can we do that better than anyone else?” and “How do we need to line up to deliver that across everything we do?” This will be appreciated by the CEO and will demonstrate a CMO’s leadership to the rest of the C-Suite and the board of directors.
It’s also crucial for new CMOs to make sure their expectations for their team are understood. First and foremost, you want people with functional expertise: people who can wear an enterprise hat, and people who can discuss and build upon each other’s ideas.
About Kellogg’s CMO Program: The Kellogg School’s Chief Marketing Officer Program, led by professors Gregory Carpenter and Eric Leininger, is designed to train newly appointed CMOs or people who are preparing to assume CMO or equivalent positions. The program’s content is wide-ranging, but one particularly unique element of that content is direct, unfiltered advice from current and former C-Suite executives.
There are purchases that keep purchasing managers up at night—the crucial products and services that contribute to a company’s ability to differentiate its offerings to its customers. These strategic purchases require attention, research, and resources. And then there are all the other necessary but undifferentiated, nonstrategic products and services they are responsible for purchasing. The ho-hum mailing supplies. The unsexy rebar. The sturdy, boring shelving units. Which is not to say that these purchases are not important for the company. But given their lower strategic priority, the purchasing process itself has to happen as efficiently as possible in order to benefit the company. So how does a purchasing manager decide which suppliers to count on for these nonstrategic products, and how do suppliers gain an edge in the process? The key is finding a useful extra to justify the purchase.
The 80/20 Rule
According to recent research by James C. Anderson, the William L. Ford professor of marketing and wholesale distribution at Northwestern University’s Kellogg School of Management, and his colleagues James A. Narus and Marc Wouters, “we’re seeing that some progressive purchasing managers are starting to employ an 80/20 rule, where 80% of their time should be spent on the 20% of the items they purchase that are strategic” to the company’s business.
“That leaves only 20% of their time to purchase the remaining 80%—the nonstrategic items. So that means that they just don’t have the time or the knowledge to spend [on nonstrategic purchases],” Anderson says. “They may be making a purchase decision on these things only once each year or two, so they aren’t really keeping abreast of that item. They’re forced to buy a lot of things they don’t know much about.” This often leads to a “very cursory type of evaluation.”
To overcome this combination of time crunch and knowledge gap and make the right purchases, it is also important for the purchasing manager to involve the supplier as well as the product or service’s users in the process of identifying value-added extras. “[Purchasers] say, ‘the supplier may know more about that then we do, so let them suggest something to us,’” Anderson says.
He suggests that purchasers request “tiebreakers” to help them choose from among competing bids and allow them to justify the purchasing decision. “Going back to the finalists to ask, ‘Is there something more that your business might do for us, other than what we’ve asked for?’ is a way to have one of them stand out so they can make it an easy choice,” Anderson says. “This also makes it easily explainable to the rest of the business.”
A Better Tiebreaker
Interestingly, the winning response most often does not involve price concessions. In their research, Anderson and his colleagues set out to determine whether price concessions were the determining factor in suppliers winning business. “We did not hear a single purchasing manager in our research say they wanted the lowest price,” says Anderson.
There are several reasons why the lowest bid may not have much of an upside for the purchasing manager. “If they always buy at the lowest price, after awhile people ask, ‘why do we have these purchasing guys? We could have software that could do that,’” Anderson says. “Likewise, if they buy at lowest price and anything goes wrong, then it’s on them. ‘What were you thinking? You went for the lowest price and now we have this problem as a result.’”
Indeed, the researchers were surprised to find that price concessions have an unintended consequence. “If the supplier offers a price concession,” Anderson says, “this leads to more work, because then purchasing managers have to go back to the other finalist suppliers, give them a chance to reduce their prices, and then, having done that, they still have to return to finding a justifier: the one noteworthy extra that the other suppliers can’t, or won’t, supply.”
The most practical argument against a lowest-price offer, then, comes down to the decision of where purchasing managers put their resources. “Purchasing managers are looking to get in and out of these purchases quickly. They don’t want to have to start investigating why the prices are so low, particularly if it’s a supplier they don’t have experience with,” Anderson says.
The Next Justifiers
Once a purchasing manager narrows the options, what processes can they and their suppliers employ to find justifiers that add value to nonstrategic purchases? How can they build those processes into their purchasing? The answers are not so simple, given the nature of justifiers themselves.
In today’s highly segmented marketplace, “you need more justifiers,” Anderson says. “They’re going to have to be more nuanced because it’s more segment-specific ideas. What works for a small-to- medium sized professional-services firm is different from a small-to-medium sized gear shop.”
In addition, Anderson and his colleagues found that justifiers incorporating expertise—such as manufacturing and cutting rebar so that it lies flat (making it easier for construction workers to handle)—may be more sustainable than justifiers that add simple operational efficiencies, like supplying parts with the customer’s own part numbers on the packaging. But by their nature, justifiers have a limited lifespan, as other competitors incorporate those extras into their own offerings.
Advice for Suppliers
Anderson has advice for suppliers hoping to woo purchasing managers, too. He recommends that suppliers focus resources on improving their capability to identify, provision, and deliver justifiers. This includes creating a framework where insights can be generated, for example, as a standard part of a quarterly account review, and then turned into processes.
In a Harvard Business Review article discussing their research, Anderson and his colleagues describe how the shipping company UPS “has reorganized its marketing and selling efforts around targeted industry segments such as health care, retail, and professional services, as well as U.S. regions with strong growth potential,” and has assigned field managers to each region and segment. This increased collection, combined with encouragement from the company’s headquarters to share findings, has resulted in justifiers that have helped the company win significant new business.
What suppliers should not do is assume that, because the purchase is nonstrategic for a customer, it should be treated as a commodity. “Then a commodity mindset kicks in. They think, ‘What’s the only way we can increase profitability for these items? Well, reduce cost. What’s the only way we can reduce our costs? Well, we can reduce the amount of time that’s spent selling these items,’” explains Anderson. “So they up the sales productivity measures such that the salesperson doesn’t really have time to have a real conversation with the purchasing manager about this.” Without building in those conversations, discovering what might help make the offering better for the purchasing company becomes more difficult.
Thus, in the end, Anderson’s advice for suppliers is not all that different from his advice for purchasers. Ask open-ended questions that encourage customers to mention ideas or elements that they would find helpful or attractive. Some of these may have been overlooked or even considered inherent parts of the manufacturing process. But investigating them further to provision a justifier may have clear value to the purchaser’s business—and it may just win you a customer.
See more Kellogg Insight articles by Marketing professors
Data analytics can transform organizations when leaders use it wisely
More Kellogg News
Mar 04, 2015, 11:00 AM
Mar 06, 2015, 12:20 PM
Mar 18, 2015, 11:00 AM
Apr 01, 2015, 11:00 AM
Apr 18, 2015, 8:30 AM